Corporate VCs and VCs: Who wins the battle?

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In 2016, Intel Capital and Google Ventures were the most active corporate venture capital (CVC), according to a CB Insights report, participating in almost 50 investments each.

They were also the first to launch, Intel Capital in 1991 and Google Ventures in 2009, followed by Salesforce Ventures and Comcast Ventures in 2014 and 2011 respectively.

More corporates are dipping their toes in venture capital, allocating big budgets to invest and support startups and manage mergers and acquisitions. According to the same report, CVCs participated in a total of $ 24.9 billion of funding across 1,352 deals in 2016. 107 new global CVCs made their first investments in the same year - a number that increased by 20 percent from 2015.

Some of the most active CVCs in the UK, India and China. (Image via CB Insights)

These important numbers bring us to the inevitable conclusion: Should startups opt for a CVC or a VC? Are CVCs competing with VCs? Where are the MENA’s big corporate funds?

What does what?

In order to make the distinction between both types, it is worth looking at their objectives first. Another study conducted by CB Insights revealed that CVCs and VCs complement each other and seek to invest in high-growth businesses. However the first one provides businesses with in-depth industry knowledge while the second helps them improve the structure of their companies and monetize.

“CVCs are more focused, depending on the company’s expertise,” said Mohammed Alhajeri, director of KISP Ventures, a $30 million fund established by KFH Capital and Impulse International in Kuwait to manage seed and Series A investments. Alhajeri will be talking about the real value of CVCs during a fireside chat at GITEX Future Stars, on October 10. [Disclaimer: KFH is wholly-owned by Kuwait Finance House].

That said, CVCs tend to look for quicker profiles, according to Alhajeri.

Unlike the VC which is an independent entity, a CVC’s structure is much different. It is either internal, where the venture has a dedicated department within the corporation, or external. The first one is a bit bureaucratic and has a dependent decision-making process while the second is independent and only follows certain guidelines set by the board members, according to Alhajeri.

“In both cases, the corporate shouldn’t be directly managing the startups. They should allow startups to grow on their own till a potential acquisition,” said Kamal Hassan, general partner at Turn8 venture fund. “Most corporates, except few very large ones, have no infrastructure to properly manage innovation. They typically kill innovation due to their complex corporate governance. They should allow some disruption.”

Alhajeri on the other hand said that corporates that want to save cost go for an internal structure and set up an internal team to run ventures.

Where are the region’s CVCs?

A report conducted by Wamda Research Lab and Expo 2020 on the state of corporate-startup engagement in the MENA region, revealed interesting numbers on the role of regional companies in supporting startups.

Since 2011, 11 CVCs were created by regional corporations to boost startup investment and engagement, the report highlighted. Some of these funds include Hikma Ventures in Jordan, Arzan Capital in Kuwait, MBC Ventures in the UAE, and STC Ventures in Saudi Arabia among others.

According to the report, the startups that signed a partnership with a CVC, were in the market for over three years, and have serial entrepreneurs as part of their founding team.

While some CVCs have purely financial goals, as the report stated, others look to strategically invest and add value to the startup and the corporation as well.

A CVC may use the startups’ innovation as a competitive advantage, said Hassan. Startups can also help corporations reduce internal research and development (R&D) cost, bet on multiple innovations and look for disruptive technologies, he added.

Startups working with a CVC will be able to test their ideas properly and get access to the right tools, according to KPMG, a global firm for audit, tax, and advisory services.

Startups will also benefit from a wide network of potential clients.

“[Our network includes] Islamic banks from Turkey, Kuwait, Bahrain and Saudi Arabia and we can help with banking-related things, integration, or introductions to clients,” explained Alhajeri on the startup advantages of working with a CVC. “We have a network that spreads from Silicon Valley to here. Funds in the East Coast, Europe, London and Germany.”

CVCs: an innovation tool?

Looking at global and regional CVCs, one notices that they are all attached to a big name like Google, Microsoft and Intel. A research by business school INSEAD explained the reason for this.

According to the research, ‘CVC has become a crucial tool for big firms under pressure to innovate faster. It gives them a window into new technologies and a way to access novel ideas. Companies like Apple and Intel have also used CVC to nurture whole ecosystems around their products, boosting demand’.

Alhajeri believes that CVCs are also much more experienced than regular VCs, due to their industry focus and years of experience. CVCs usually invest in startups that are active in the same business fields as theirs. Google Ventures and Qualcomm for example, would only invest in things that make sense to them, and in areas where they’re knowledgeable. Otherwise they can't add value.

“Most of them [VCs] are in the first series of their funds. Other funds are struggling to raise a second round,” he said.

So which one should entrepreneurs go with? The industry, Alhajeri said, not the fund itself. A startup in the real estate business should not approach a regular VC, he explained. But if a startup sells a software for restaurants, he continued, it shouldn’t consider them. “We won’t add value.”